Starbucks Shifts Focus To Value, Cost Cutting
by Janet Adamy
Starbucks Corp., unable to stem a slide in sales growth that began a year ago as consumers started to rein in spending, is trying to adapt to the weak economy with a new emphasis on retaining customers, cutting costs and promoting the value of its products.
Executives of the Seattle-based coffee giant outlined the strategy in New York at the company's biennial analyst conference. Among other thins, company executives promised investors that they would wring out $400 million of costs by next fall by doing everything from saving labor to using a single recipe for banana bread, instead of 11.
Its presentations illustrated the fundamental shift taking place at a retailer that for years relied on rapid expansion to fuel its sales and profit growth.
Starbucks, a brand that taught customers to trade up, is changing tack after discovering that its most faithful customers are saving money in part by making several fewer visits a month to the chain. It recently launched a loyalty card and other promotions that offer customers cheaper drinks and allow it to target the chain's most-frequent visitors, who come to Starbucks an average 16 times a month.
New figures the company released Thursday show that, instead of the bottoming out Starbucks predicted in October, the company's same-store sales have gotten worse. Though its overall revenues have grown, sales at U.S. stores open at least a year fell 9% in October and November from a year earlier. That was to percentage points more than during the fiscal quarter that preceded those months.
The company said it no longer expects to meet analysts' consensus estimates for earnings in its fiscal first quarter ending Dec. 28. That estimate is 22 cents a share, according to Thomson Reuters.
Still, Starbucks shares fell three cents to $8.61 in 4 p.m. trading on the Nasdaq Stock Market.
"We're beating ourselves up every day because we're just never seen numbers like this," Howard Schultz, the company's chairman and chief executive, told the conference crowd.
Mr. Schultz said he expects the economic climate in 2009 to be more difficult than the past six months, but he tried to reassure investors that Starbucks would rebound when the economy recovered.
Despite the current recession, Mr. Schultz said Starbucks shouldn't fundamentally change its business and move toward the type of discounting done at fast-food chains.
Executives said the company has no plans to announce another batch of store closures but indicated they are monitoring the store portfolio carefully. The few new stores Starbucks will open next year will be more focused on urban markets after years of expansion into suburbia and the country's midsection.
In January, Starbucks plans to start selling its Seattles' Best Coffee brand at 1,900 locations of the Subway sandwich chain. Early next year, it will introduce a new line of tea latters as part of a broader plan to place more emphasis on tea.
Michelle Gass, a Starbucks executive vice president, said the coffee chain is paying keen attention to McDonald's Corp. restaurants in Detroit and Kansas City, the first markets where the fast-food chain has sold latters, cappuccinos and other espresso drinks.
She said that Starbucks locations in those markets haven't seen a change in their performance trends, a sign that McDonald's may not cut into Starbucks's sales.